The 1-2-3 Money Plan

For years, people who know me well have been encouraging me to read Michael Chabon’s The Amazing Adventures of Kavalier & Clay. “You’ll love it,” they’d tell me. “A lot of it is about comic books.” My friends were right: I’m the target audience for this book. Here it is late Wednesday night, and I’ve spent the past few hours unable to put it down. I had to finish.

But Kavalier & Clay isn’t the only great book I’ve read recently. I’ve lucked into a string of great personal-finance volumes, too. Out of the past half-dozen money books I’ve read, not a one has been a dud. Some examples include:

The Quiet Millionaire is an excellent sourcebook for “third-stagers” (those who have eliminated debt and mastered the basics of money management).

And Alexandra Levit’s New Job, New You is packed with tips for career-changers (but don’t look for it yet — the book won’t be in stores until January).

Another in this list of great books is Gregory Karp’s The 1-2-3 Money Plan. Karp is a nationally-syndicated finance writer. His “Spending Smart” column appears in newspapers across the United States. Among other things, he’s a firm believer that more Americans should consider switching to prepaid cell phone plans.

In The 1-2-3 Money Plan, Karp aims to arm readers with enough information to make good financial choices on a day-to-day basis. Like me, Karp doesn’t believe it’s necessary (or even desirable) to spend a lot of time searching for the “best” option. He writes:

Every money decision doesn’t have to be the very, absolute best you could possibly do. Sometimes good enough is good enough. You will accomplish your goals. Get it done and get on with your life. After all, so many of us don’t want to devote innumerable hours to dealing with our finances and picking nits with our spending.

Exactly. This philosophy is the source of my mantras: “Do what works for you” and “The perfect is the enemy of the good”. It’s better to make a good choice now than to make constant delays hunting for the best choice.

1. Invest automatically. Invest 10 percent of your income into a retirement plan, such as a 401(k) or Roth IRA.

2. Diversify. Invest all the money in a target-date retirement fund closest to when you’ll retire.

3. Hold on. Never touch the money until you retire.

Each list of action steps is followed by a detailed explanation. Why should you invest automatically? Why should you diversify? Why should you leave the money untouched? Karp explains his rationale in the pages that follow.

The book is also packed with tips and tangents. Karp spends two pages, for example, detailing his experience purchasing eyeglasses online. Most of his tips look something like this:

Quick Tip
When buying something that will depreciate, imagine what you could sell it for at a garage sale the next day. A $15 music CD becomes 75 cents. An $80 cordless phone becomes $6. A $50 toaster oven becomes $5. That puts the purchases in perspective in a hurry.

The 1-2-3 Money Plan isn’t a conceptual book. Karp does provide a framework for making decisions, but this book is more about providing actual practical tips that readers can use to save money today. It’s a distillation of current financial wisdom delivered in concentrated doses, real-world solutions to real-world problems.

Note:The 1-2-3 Money Plan deliberately focuses on the spending side of the wealth equation. It doesn’t address income and earning. It’s true that you can get the most bang for your buck by boosting your income, but everyone has to live within their means. (“You can’t outearn dumb spending,” as Karp writes.) And besides, it’s easier to cut spending than it is to increase earnings.

If this book has a drawback, it’s that its advice is too narrow. Because of the detailed nature of the advice, much of the information is specific to products, situations, and websites that are very 2009. The book should still be relevant for a year or two, but it will eventually become dated.

But this year — today — The 1-2-3 Money Plan is an excellent resource for those folks who are looking for more ways to save money in their day-to-day lives.

Note: Author Greg Karp will be our guest on Monday’s episode of The Personal Finance Hour. If you’d like to ask him a question, be sure to call in between 3pm and 4pm Pacific (6pm and 7pm Eastern). Or feel free leave a question in your comment on this review.

You can’t outearn dumb spending. Wow what a sentence. Makes perfect sense. It’s about time a specific/narrow book comes out on personal finance. Too often do I read a book that is very general and leaves me with more questions than answers.

Now those are steps I like. Nothing huge, nothing elaborate, nothing scary. Aside from the 10% number, I’m following the retirement steps rather close.

Funny that it’s easier for people to get finance in small, manageable chunks, but you rarely find books this way. Not sure if I’ll read it, though… I find that the bits that I take away get smaller and smaller each time the more I learn. Not necessarily a bad thing, but one can only read so many books on one topic before they all start sounding relatively the same.

I applaud a book that has a narrow focus and leaves the reader with a definite plan. I agree with the philosophy, Reducing spending is easier than increasing income.

I do want to comment, though, on the garage sale tip. My neighborhood just had its annual garage sale, and items were priced entirely too high. My husband browsed the sales and small tables were priced at $150, knifes at $30! So, I’m not sure where sales are happening and prices are under a dollar or two.

For those who have read “The Quiet Millionaire”, do you think it would be useful for non-Americans?

It looks like a great book, but on the Amazon page I noticed reference to a lot of seemingly US-centric chapters (health care costs, 401ks, Roth IRAs, taxation, etc.), and I just want to know if it’s worht the long trek to the library to check out if those aren’t really applicable.

That sounds like a great book and I will def check it out when the time comes. As for me and my family, we have already taken the prepaid plunge and havent looked back. Details on how we switched here. http://gomestic.com/consumer-information/tracfone/

We are actually ahead of projected savings and our total cost just keeps dropping the more we stretch the minutes!

Back in the 70s, I was guided by Michael Phillips’ The Seven Laws of Money. It is in reprint from Shambala. I had forgotten about it until I read this current post. Found a summary online (the book is much more useful!):

THE SEVEN LAWS OF MONEY

The following laws were published in 1977 in ‘Seven laws of Money’ by Mike Phillips. Mike, a Bank of America banker, was instrumental in developing Master Charge.

1. Do it! Money will come when you are doing the right thing. The first law is the hardest for most people to accept and is the source of the most distress. The clearest translation of this in terms of personal advice is “go ahead and do what you want to do.” Worry about your ability to do it and competence to do it, but certainly do not worry about the money.

2. Money has its own rules: records, budgets, savings, borrowing. The rules of money are probably Ben Franklin-type rules, such as never squander it, don’t be a spendthrift, be very careful, you have to account for what you’re doing, you must keep track of it, and you can never ignore what happens to money.

3. Money is a dream – a fantasy as alluring as the Pied Piper. Money is very much a state of mind. It’s much like the states of consciousness that you see on an acid trip… It is fantasy in itself, purely a dream. People who go after it as though it were real and tangible, say a person who is trying to earn a hundred- thousand dollars, orient their lives and end up in such a way as to have been significantly changed simply to have reached that goal. They become part of that object and since the object is a dream ( a mirage) they become quite different from what they set out to be.

4. Money is a nightmare – in jail, robbery, fears of poverty. I am not expressing a moral judgment. I am making very clear something that many people aren’t conscious of: among the people we punish, the people we have to take out of society, 80% or more are people who are unable to deal with money. Money is also a nightmare when looked at from the opposite perspective – from the point of view of people who have inherited a lot of money. The western dream is to have a lot of money, and then you can lead a life of leisure and happiness. Nothing in my experience could be further from the truth.

5. You can never give money away. Looked at over a period of time, money flows in certain channels, like electricity through wires. The wires define the relationship, and the flow is the significant thing to look at. The fifth law of money suggests that by looking at the gift in a larger or longer-term perspective, we will see that it is part of a two-way flow.

6. You can never really receive money as a gift. Money is either borrowed or lent or possibly invested. It is never given or received without those concepts implicit in it. Giving money requires some payment; if it’s not repaid the nightmare elements enter into it. A gift of money is really a contract; it’s really a repayable loan, and it requires performance and an accounting of performance that is satisfactory to the giver.

7. There are worlds without money. They are the worlds of art, poetry, music, dance, sex, etc. the essentials of human life. The seventh law is like a star that is your guide. You know that you cannot live on the star; it is not physically a part of your life, but rather an aid to orientation. You are not going to reach this star, but in some sense neither are you going to reach your destination without it to guide you.

Prepaid cellular service has now saved me at least $2500 since I started using it in September ’04 (estimating a conservative $40/month savings). The iPhone is indeed tempting, but I can’t bear to pay the monthly fees and enter into a multi-year contract, eek! I’m not a big talker and it fits my lifestyle perfectly. The mobile phone industry has been phenomenally successful at getting people to part with $50-60/month and providing very little value — what do thousands of minutes of talk time really mean when most people never, ever use them? They are just a number in the computer. If people prepaid for water or electricity in the same manner, the silliness would be evident immediately.

@KateThe Quiet Millionaire does have some non-U.S. stuff in it, but most of it is U.S.-centric. Your not going to get much out of the specific steps that are recommended, but you might profit from the general discussion. I wouldn’t go out of your way to pick it up at the library, but it couldn’t hurt to grab it if you’re going to be there already.

@Dan
I don’t know what the best book is for third-stagers. If I find out, I’ll be sure to mention it.

@Everyone
I should note that no matter how good a personal finance book is, it’s never really going to compare to Dickens or Proust — or Kavalier & Clay.

On the depreciation tip, I use something different (cost per use) for consumer goods. Sometimes a higher quality/more expensive product is a better buy if I get more uses out of it. After going through 2-3 cheap irons, I finally bought a really good iron, it works well and I’ve had it for years now.

rabbit (#6) beat me to it; Kavalier & Clay should really be followed up by The Fortress of Solitude. Both feature comic books prominently, but are really about unlikely friendships. I’m nearly done Fortress, and I’ll be looking into more of Lethem’s books shortly.

Kavalier & Clay also led me to Chabon’s ‘Yiddish Policemen’s Union’ which was thoroughly entertaining and hard to put down.

Good advice. I delayed signing up with my employer’s 401(k) plan for far too long because I just didn’t want to deal with figuring out how to invest the money. I finally just did a 10% contribution and put it in a bond fund, and as I learned more about investments I increased the contribution and diversified.

I have a budget that each month isn’t met for one reason or another. I support my wife and 1-year-old with a job that pays 30k a year that i’m locked into for another 2 years. After that time I will be earning more and we may have a dual income as well. Until then (and I have a host of clever tricks to pay my bills AND earn interest, i’m debt free and own my home) we monthly spend more out of savings than we put in. How can I develop a positive cash flow on 2k a month, we’re down to one car, our shopping bill (according to the shopper) can’t be lowered (and I trust her judgement)we make use of prompt payment discounts, veggie gardens (we even worked out the benefits and savings of starting small hydroponically grown lettuces) I do all the handy hubbie work around the house. What’s left?

I love systems that keep it simple. People often are paralyzed by needing to make financial decision like where to save money. But, if they would just save 10% and invest it somewhere they would be better off than by not saving.

If American’s would only follow this simply formula for their retirement planning! If you are a young professional and would follow these simply steps, then you would far less worries at time of retirement. Let’s take a little closer look at each one,

Retirement 1-2-3

1. Invest automatically. Invest 10 percent of your income into a retirement plan, such as a 401(k) or Roth IRA.Action Plan: If you are an employee start contributing 10% or $100 a week to your employers 401k or Roth IRA. If you are self-employed, contact a financial advisor and open up a Roth IRA and contribute $100 a week. If you open up a SEP IRA you can contribute up to $49k in 2009 compared to $5k in a Roth IRA.

2. Diversify. Invest all the money in a target-date retirement fund closest to when you’ll retire.Action Plan: Make sure that your money is in the right mutual funds within your 401k or Roth IRA. The rule of thumb is, the younger you are the more you can be in funds allocated mostly to stocks.

3. Hold on. Never touch the money until you retire. Action Plan: It’s simply don’t try to time the market. Most people get in at the worst possible time (near the peak) and get out at the worst possible time (near the trough). You cannot let your emotions tell you when to invest. Let take a look at the S&P 500 from Jan 1994 to Jan 2004.

# of Trading Days…………………10 Year Annualized Return
All 2,519 Trading Days……………………………11.2%
Less Top 10 Trading Days…………………………6.1%
Less Top 20 Trading Days…………………………2.2%
Less Top 30 Trading Days………………………..-1.2%

As you can tell it’s extremely important to remain in the market and not to try and time it. You can’t afford to miss the best days. I really feel bad for all those who could not long withstand the pain any longer and jumped out of the market back in May or June. The market has rallied significantly since then and if they didn’t catch those gains, chances are, they will never see their account balance back to where it was just a few short years ago. Stay invested.

Thanks for the new resource. I’m a fellow financial geek, so I have read several of the books you referenced. It seems that most contain similar core information, but it’s refreshing to see it presented in new ways. Now that I’ve got my new blog off the ground, I’m on the look-out for materials that specifically address finances (and numerous other topics) in marriage. I’m sure there are many good reads on the topic, and some good stuff right here on GRS as I have time to dig deeper.

Re #17: I would guess that grocery bills can be lowered. Cloth diapers for your little one. If little one is a girl, your diaper days may soon be over. See if any of your books/cds are worth something on Amazon.

With a low income, even small savings are magnified. Buy 3 of whatever is on sale at grocery this week. Repeat. Repeat. Eat beans and rice–delicious and not a sacrifice. Remember, that toddlers don’t need special “toddler food.’ Just mash up what you’re having. Swap babysitting with friends.

Wife starts getting income now — working nights, weekends or from home so you don’t have to work out daycare. Maybe it doesn’t fit with your plans, but it does generate income with no additional cost. Alternatively, you get a side job (although with your description of being locked into a job, I have a sneaking suspicion that you are in the military — if that’s the case, thanks for serving!!)

Cut the mobile phone. If you are paying $50-60 a month per phones (plus data plans), you go to one phone. Or you both go prepaid and use the phones only when strictly needed. You’ll pay $7/phone per month. And no contract, either.

She learns how to cut your hair (although if you are military, this is pretty easy )

Cut out the cable TV and get some rabbit ears. Alternatively, cut out premium channels.

Cut out Netflix and get movies from the library.

Go to a slower Internet service.

Drop your land line in favor of cell phones. Or see if you can get VOIP service either from your phone company, using Vonage or going to something like Skype.

You become a no-car family (may not be possible, or might be — you may have access to decent transit or car sharing like Zipcar).

Cut back on meals out, pack your lunch. Brew coffee at home. If you smoke, quit.

@ #17 John – My partner and I have been living on $1800-1900/ mo. for way more than a year now (we’re both grad students) and its not that hard. We are very careful with how we spend money. Considering that 2/3 of that auromatically goes to rent, plus another $200-250 in utilities/ insurance leaves us with $300-400/ mo. for food and gas. My partner uses public transit to get to school and I work from home. We have 1 car that we use often but maybe we use 1-2 tankfuls of gas a month (2 if we go out A LOT). We stock up at excellent food sales and try to buy fresh produce 1x a week, rarely buy anything new unless its very marked down, go to the library religiously for books, cds, dvds, and books on tape, watch tv on one of our computers, don’t have cable, and don’t have a landline (we have 2 separate cell phones). Granted, we don’t have any kids or pets (we don’t want them AND can’t afford them), but we do go out and do free stuff around town a lot, hang out with friends, and we cook and eat a lot. We’re very budget conscious (we have to be), but we aren’t deprived by a long shot.

That 1-2-3 retirement plan advice is terrible in so many ways. Let’s start with target date retirement funds. They have proven themselves in 2008-2009 to be very poor investing options for retirement. The problem with personal finance writers is that if they decide they are experts in frugal living, they ordain themselves experts in retirement planning. NOT. If this is the kind of advice we can expect from this book, I’ll skip it.

The simplicity of this advice is almost stunning! Life can be just as complicated as we can make it, and most of us can do a pretty good job of that.

I’ve seen people with complicated financial situations (I’m an accountant by trade) and I’ve seen those with simpler arrangements. Both can be quite prosperous, but it seems those on the simpler path enjoy their lives quite a bit more.

I find the comment about prepaid cell phones interesting in comparison to traget-date retirement funds. It appears we are trying to lower our expense with a prepaid but paying no attention to our expense in the mutual fund.

The target-date retirement funds are some of the highest fee funds available. Your 401k plan should provide 3 funds in which you can easily use to create your own target-date retirement fund with about 0.7% less in fees every year; S&P 500 index, Bond Index, and a moneymarket account. As you get older move more money from the S&P index into the Bond Index and moneymarket.

Every money decision doesn’t have to be the very, absolute best you could possibly do. Sometimes good enough is good enough. You will accomplish your goals. Get it done and get on with your life. After all, so many of us don’t want to devote innumerable hours to dealing with our finances and picking nits with our spending.

Amen. You can go to any forum related to frugality and easily find people getting OCD for hours on how to save 20 cents worth of detergent.

Not every target-date retirement fund has higher expenses. For instance, Vanguard’s target-date retirement fund does not overcharge fees- mine is 0.21%. I believe some funds under Fidelity follow the same fee system. It is important to not overgeneralize; for those less experienced with the market or those who don’t have a lot of additional time researching, I think target-date retirement funds are a strong option. In addition, for those without the benefit of having a 401K (such as me), the funds are a great option for a Roth IRA. Obviously, many of these financial books are written for people who just want to get their finances under control.

I agree wholeheartedly with the author. I try not to let my “frugal living” dominate my life. If I get some great deal on something, I don’t brag to my friends about it for months, and on the flip side, if I do make a mistake that costs me money, I certainly don’t dwell on it and beat myself up for it.

Frugal living is something that you need to take seriously, but not TOO seriously.

We’ve already cut one cell phone, our plan is prepay. We don’t smoke, my wife cuts my hair (which means I’m growing it out for awhile) we have one car, I take the bus to work (i’m in an apprenticship scheme in New Zealand– hence locked into a contract, however there is room for pay rises.) we use cloth nappies for our little one. We only shop on the local supermarket’s savings day. The farmers market near us is much more expensive than the grocery store. we don’t have tv, and my fast internet is our only source of entertainment (and a valuable resource in our lives, it’s also the cheapest plan on the telco market) i’m an avid consumer researcher and nothing gets bought without a few weeks of checking out stores, online auctions and procrastinating (a powerful money saving tool) We cook all our own meals (well, maybe one or two nights a month we eat out)

All our bills are paid through our credit card, with ‘payments’ put in a savings account until the credit card payment is due. ummm….

I think the end solution is to wait, to recognize that this time is fleeting and better wages and opportunities will come. Besides, i’d rather sit an play with blocks with my daughter than worry that i’ve had to supplement my income with an extra couple hundie from savings.

If there are any further suggestions, please. That’s why im commenting and have been reading GRS for the last year. If not, thanks to those who have taken the time to reply.

We’ve already cut one cell phone, our plan is prepay. We don’t smoke, my wife cuts my hair (which means I’m growing it out for awhile) we have one car, I take the bus to work (i’m in an apprenticship scheme in New Zealand– hence locked into a contract, however there is room for pay rises.) we use cloth nappies for our little one. We only shop on the local supermarket’s savings day. The farmers market near us is much more expensive than the grocery store. we don’t have tv, and my fast internet is our only source of entertainment (and a valuable resource in our lives, it’s also the cheapest plan on the telco market) i’m an avid consumer researcher and nothing gets bought without a few weeks of checking out stores, online auctions and procrastinating (a powerful money saving tool) We cook all our own meals (well, maybe one or two nights a month we eat out)

All our bills are paid through our credit card, with ‘payments’ put in a savings account until the credit card payment is due. ummm….

I think the end solution is to wait, to recognize that this time is fleeting and better wages and opportunities will come. Besides, i’d rather sit an play with blocks with my daughter than worry that i’ve had to supplement my income with an extra couple hundie from savings.

If there are any further suggestions, please. That’s why im commenting and have been reading GRS for the last year. If not, thanks to those who have taken the time to reply.

@John — the other thing that comes up is to really re-examine that grocery list. You might be able to make some small, incremental changes that might make some small difference. For instance, if you are buying pre-packaged convenience foods, you might want try going to more whole foods. But you may be doing that already.

You might want to also write a “priority budget” with your wife’s help. Put the most important stuff at the top, the least important stuff at the bottom. The bottom is where you might be able to glean some extra savings.

It does sound like you are living on your means and are working on a means to get ahead with your apprenticeship program. Other suggestions I’ve already made deal more with getting the income up — you taking a second job, she taking a side job, doing something online, etc.

John (32)–We’ve had success setting a fixed grocery budget. We have teenagers so it’s absolutely necessary. If you buy it, they’ll eat it, and they might bring in some friends to help, so something had to be done.

We set the budget at X, and MAKE it work within that number. We might splurge on some desired luxuries, but if we do, something else will be put back. If they wan’t some ridiculous fun food item, fine, we’ll buy it, but that means you’ll be having soup and grilled cheese twice for dinner this week instead of once. In this way we’re demonstrating trade-offs too, something they need to learn.

I don’t know that helps in your situation since your child is younger, but it sure works with teens. You might be able to work a variation of it in a different direction.

I’ll have to check this book out. Frugality is a hot topic right now, and I’m going to wager it will be the norm for well into the future. In the long-term, we’ll all be better off if people become smarter with their spending and save more.

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